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Business & farm
There is another complication. The usual rule under I.R.C. 643(a) is that capital gains stay with the trust (i.e. are taxable to the trust and are not part of DNI - distributable [to a beneficiary] net income) unless an exception applies. "
The exceptions are complicated and must be consistently followed, sometimes from the trust's first year.
You might want to consult with a professional (CPA, tax attorney -- and one who does trusts all day not now and then) for the first year to make sure how to make things work the way you want to. Well worth buying an hour of their time.
In particular see the rules as described in the IRS regulations
https://www.law.cornell.edu/cfr/text/26/1.643(a)-3
or perhaps more readable this article.
https://www.thetaxadviser.com/issues/2014/aug/tax-clinic-03.html
in particular if the terms of the trust combined with state law do not allocate capital gains to income, which is unlikely in my experience, you are probably better off relying on a consistent, from day one, application of Treas. Reg. 1-643(a)-3(b)(3) and exception 3 (" Allocated to Corpus but Actually Distributed") in the article.
That exception applies if you actually distribute the capital gains to a beneficiary and/or use the amount of gains in a year to determine how much to distribute.
That is a bit confusing because the whole 643 DNI paradigm otherwise does not trace what money is distributed. I.e. A trust earning only $1000 in interest on 12/01 but distributing $700 cash to a bene on 03/01, is treated as having distributed $700 of interest income to the bene (and having $300 of interest income itself). That is so even though the $700 distributed was not the interest income. Capital gains are confusingly different, though I'm not sure if they really require tracing. That's why I recommend getting a professional opinion at the start and following it.
Also of interest to your brother when planning is the ability to make distributions during the first 65 days of a new trust tax year and elect (on the trusts 1041) to treat them as having been made in the prior year. See https://www.law.cornell.edu/uscode/text/26/663 paragraph (b).
Finally also in the arsenal of a trustee of a irrevocable trust is the ability to distribute assets in-kind (without selling). I.R.C. 643(e). The bene keeps the trust's basis and only pays capital gains when sold. Yet the fair-market value of the distribution is DNI. This only applies to certain distributions. In particular it does not apply to distributions described in I.R.C. 663(a), which include a gift under the terms of the trust that is a specific sum of money (or specific property) and is paid in not more than 3 installments and charitable distributions. https://www.law.cornell.edu/uscode/text/26/663
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